Covid-19 Measures in General

Disclaimer

This report was published, in good faith, based on the prevailing information, at 1.00pm on 23 Mar 2020. The situation is changing on a daily basis and any updates to this report will be clearly marked with a date time stamp.

1 of 3 Covid-19 Measures in General
2 of 3 Covid-19 Support For Freelancers
3 of 3 Covid-19 Bounce Back Loans

Overview

The Government measures are designed to target employees and businesses which are directly affected by the Covid-19 issue. We can argue that we are all affected, but having had dealings with HMRC for 35+ years they can be tricky, and so we suggest that you keep evidence in case you need to (at a later date) show how you have been affected. That includes:

• Medical correspondence for those worst affected.
• Employer correspondence for those laid off.
• Business correspondence for those who experience a downturn.

Do not routinely delete those emails. If somebody cancels a piece of work (or worse) please keep a copy of that email for 6 years beyond the end of your trading year (or tax year).

VAT Registered Taxpayers

VAT due for quarters ended 29 Feb 2020 through to 30 Jun 2020 inclusive will not become due until 7 Aug 2020 at the earliest. This right is automatic and (Government says) no action needs to be taken. If you have VAT to pay, you can pay it on your normal due date if you wish, or hold on to the cash and pay on 7 Aug 2020. No interest will be charged. If you are due a VAT repayment these will be processed as normal.

If you pay quarterly VAT by Direct Debit and want to delay your payments then we recommend cancelling the Direct Debit now. We know from experience (foot-and-mouth disease in 2001 and the farming sector) that “this right is automatic” may not be enough to stop HMRC Direct Debit collections.

Apparently a further announcement is to be made which will allow accumulated VAT debts to be paid over time, and you are to be given until 5 Apr 2021 to bring things up to date.

Irrespective of actual payment dates, VAT returns must still be submitted within the correct time frames.

Mainstream Businesses

Most of the best measures that have been announced are contingent on you being a mainstream business, that is to say, one which:

• has commercial premises subject to business rates; and
• is eligible for either Small Business Rate Relief or Rural Rate Relief.

In these cases you will qualify for grants of up to £10,000 (originally the announcement was £3,000). Whichever local authority deals with your business rates will be in contact you and will automatically initiate the process for you.

All Businesses

Loan scheme – talk to your bank. The Government has agreed to underwrite 80% of any loan capital advanced by your bank under these emergency measures. Theoretically that makes you a lesser risk today that you were a few weeks ago. However, nothing really changes between you and the bank, your application still needs to be well founded and your repayments need to be affordable. The protection is for the bank in case your business goes bankrupt.

Employers and Employees

The Chancellor announced a new a grant from HMRC to employers to cover furloughed workers and keep people on payroll rather than laying them off. The coronavirus job retention scheme would pay up to 80% of employees’ salary to a maximum of £2,500 a month.

The job retention scheme will be backdated to 1 March, with no limit on the amount of funding, and The Chancellor stated that it will be open initially for “at least three months” but didn’t take off the table the option to extend the scheme for longer if necessary.

HMRC will implement a process to fund employers. However, HMRC is in the business of collecting tax and has less experience of handing out grants. The infrastructure to do this is currently a work in progress. Nobody knows when the first grants will be paid.

27 Mar 2019 12.30pm Update – strike out this headingSelf Employed Trade or Partnership

27 Mar 2019 12.30pm Update – new heading – All Self Assessment Cases

Self assessment tax instalments due on 31 Jul 2020 have been postponed, without interest etc, and will now become due on 31 Jan 2021. This is automatic and no action needs to be taken.

27 Mar 2019 12.30pm Update – strike out this para – Apparently you need to be in a self employed trade or be a partner in a traditional partnership to take advantage of this. That means (until we hear otherwise) that self assessment tax instalments due on 31 Jul 2020 on account of your rental income or dividend income, etc, are still due.

Freelance Limited Company

Other than claiming the 80% job retention scheme figure (see “employers” above) there are no specific provisions for small freelance limited companies.

27 Mar 2020 12.30pm update – even the eligibility for this 80% has been questioned by some legal experts. Please see this newer blogpost.

The Government is still addressing this issue and has called for submissions to made by 5pm GMT on 23 Mar 2020.

https://twitter.com/CommonsTreasury/status/1240620040803803136

Use the email address specified in that tweet and (in meaningful words) spell out precisely what you want The Cabinet Office to help with.

Other Resources

Well respected tax lecturer Giles Mooney has posted a 17 min video on YouTube:

Although we have covered key points above, clients of Proactive may be interested in the following sections:

• 10min02 – 10min40 – statutory sick pay
• 10min41 – 11min30 – the self employed
• 14min10 – 15min25 – loan guarantee
• 15min25 – 15min59 – claiming on business insurance

The Government Support for Business page is here:

https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

The Coronavirus helpline: 0300 456 3565

This telephone number has been rebranded as the Coronavirus Helpline. It’s not a new service as some claim. It has been in existence for many years and is also known as the Business Support Helpline. As far as we know, it is mainly of use to taxpayers who wanted to negotiate “time to pay” arrangements.

Amazon Web Services UK

AWS operates globally and has set up a branch in the UK for VAT purposes.

Actually, AWS has branches in 18 countries across Europe, so the applicable VAT rules for you, depend on both you and AWS having your “local” place of business in the same EU country. If you are a UK business and you need to obtain a UK VAT receipt from AWS then use the link below. Log in to your AWS account, select the appropriate month and click on the Tax Invoices drop down menu.

https://console.aws.amazon.com/billing/home#/bills

Reclaiming foreign VAT

Your UK VAT registered business can get a refund of EU VAT for most goods and services you buy for your business.

You cannot normally reclaim GST and VAT from countries outside the EU. Nor can you reclaim EU VAT if the expense is not wholly and exclusively for the purposes of your business.

Moreover:

  • you need a proper VAT receipt from the actual supplier, addressed to your business, showing the rate of VAT charged and the exact amount of VAT charged
  • a “proforma invoice” is not a proper VAT receipt
  • what you can reclaim depends on the other EU country’s rules for reclaiming VAT
  • the rules for claiming are slightly different in each EU country
  • each EU country has set a minimum amount that can be refunded
  • if your business makes both taxable and exempt supplies, you may not be able to reclaim all of the VAT you have been charged

The minimum amount you can claim varies between EU countries, but is generally:

  • €400 for claims of more than 3 months but less than a year
  • €50 for claims for a whole year or the period between your last claim and the end of the year
  • These limits apply to countries on a case by case basis. Claiming back 10 lots of €30 across 10 different countries is not possible, as each claim would not meet the €50 minimum.
  • However, if all your EU VAT bills come from (for example) France, and the VAT totals (for example) €300 then your company will be able to make one claim for a 12 month period. With the exception of the UK, all EU states have a fiscal year which ends on 31 Dec, and all VAT refund claims for a fiscal year must be submitted before the following 30 Sep.

There is nothing to stop you from doing these EU VAT refunds yourself. We charge a minimum fee of £100 plus VAT for each EU VAT refund that we complete, so you will clearly need to do a cost benefit analysis before instructing us to complete your claim. Our fee is due on completion of the claim. Your claim is then referred via HMRC to the EU state where the VAT was suffered. It then takes between 4 and 8 months for your refund to reach you.

This system is likely to change after 31 Dec 2020 once the transition period ends and the UK no longer follows EU rules.

VAT Flat Rate Scheme – The New Rules from 1 Apr 2017

The VAT Flat Rate Scheme changes from 1 Apr 2017 when new rules come into force in a heavy handed attempt to combat abuse of the system. The FRS differs from standard VAT accounting because you pay a percentage of your business turnover rather than paying the actual VAT arising on the difference between sales and purchases.

You continue to charge clients the headline rate of 20% VAT and you can potentially benefit by remitting a smaller percentage to the taxman. The FRS rates differ from sector to sector, but for IT contractors the norm used to be a rate of 14.5%. That’s changing to 16.5%.

Generally speaking, the new rules are awful! If you want to see what HMRC said about this (in Nov 2016) the press release and draft legislation are here.

Let’s consider three examples of a software developer with net annual sales of £50,000 and net VATable costs of £5,000.

Standard VAT
accounting
Old FRS Rules
2002 – 2017
New FRS Rules
2017 et seq
Sales 50,000.00 50,000.00 50,000.00
VAT 10,000.00 10,000.00 10,000.00
Total 60,000.00 60,000.00 60,000.00
Gross sales 60,000.00 60,000.00
VAT Flat rate 14.5% 16.5%
VATable costs 5,000.00
VAT 1,000.00
Total 6,000.00
VAT in 10,000.00
VAT out (1,000.00)
HMRC remittance 9,000.00 8,700.00 9,900.00
“Standard” variation NIL £300 better off £900 worse off

Double those annual sales to £100,000 (some of our clients operate at that level) and you can see that the difference could be either £600 better off or £1,800 worse off.

And do the sums the other way around, under the new FRS rules the VAT of £9,900 represents a rate of 19.8% on the sales of £50,000. That’s a bit like saying “pay all the VAT to HMRC and claim back practically nothing”. This makes the new Flat Rate Scheme nigh on useless!

You may suggest that the software developer in the example should simply deregister because the sales of £50,000 are below the VAT registration threshold of £83,000. Yes, that’s true. And then the VAT recovered would be NIL (instead of getting £1,000 back) and so the business would still be worse off, but to a greater extent!

Wiggle Room

There is not much wiggle room, unless you incur a reasonable amount of cost on “relevant goods”. The new rules are designed to impair only “limited costs” traders. That’s nearly everyone! However, try out the formula below to see if you can escape being labelled as a “limited costs” trader. This calculation has to be done every VAT quarter (so you may find that you alternate between FRS Old Rules and FRS New Rules).

The Formula

Work out your total for VAT inclusive sales.

Calculate a figure for 2% of your VAT inclusive sales.

Work out your total for VAT inclusive costs on “relevant goods”. Goods are tangible things, so be sure to ignore costs for services like office rent, freelance workers, accountants, insurance, travel, telephone calls, etc.

For the purposes of the VAT FRS rules (unless you’re a retailer of these goods) the expression “relevant goods” excludes the following:

  • Items of a capital nature
  • Cars
  • Computers
  • Printers
  • Scanners
  • Mobile phones
  • Furniture, etc
  • Fuel for motor vehicles
  • Spare parts for motor vehicles
  • Food
  • Drink
  • Anything which has a dual personal/business use (like bicycles and parts for their upkeep)

Question 1

Is your expenditure on “relevant goods” less than £250?

Yes > the new FRS rules apply > use a rate of 16.5%
No > go to Question 2

Question 2

Is your expenditure on “relevant goods” less than 2% of your VAT inclusive sales?

Yes > the new FRS rules apply > use a rate of 16.5%
No > the old FRS rules apply > use the old rate from the table of approved rates

Conclusion

If you spend more than £250 (or more than 2% of your VAT inclusive sales – whichever is the greater) every quarter, on . . .

  • pencils
  • envelopes
  • toner cartridges
  • traditional books and magazines

. . . then you may be in with a chance. In any case, you will have to give your bookkeeper a full analysis of all the goods you buy as “stuff from Amazon for £39” is not enough to tell us if these are “relevant goods”.

In a few cases, where you’re on a really low flat rate (teachers and trainers are on a 12% flat rate under the old rules) it might be worthwhile buying a few toner cartridges every quarter and then chucking them in a cupboard until you retire from business. You might then pass the test “more than 2% of your VAT inclusive sales” and you would still get your old flat rate. This has to be assessed on a case by case basis, but I have at least one lecturer who makes so much bounty on the 12% flat rate that it’s worth his while using some of that bounty to buy “relevant goods” which will languish unused, and he will still win overall!

In all other cases, we recommend leaving the Flat Rate Scheme on 31 Mar 2017 and adopting the standard approach to VAT from 1 Apr 2017. We are writing to all affected clients with a proforma letter which needs a real ink signature and which needs to be returned to us by 28 Feb 2017 so that we can get it submitted, agreed by HMRC, and implemented at midnight on 31 Mar 2017.

A withdrawal from the Flat Rate Scheme does not change the way that you bill your clients. If you’re company is VAT regsitered then it will still be VAT registered, and we will look after your VAT for you using the standard method and not the flat rate method.

Lastly

Beware of trying to fiddle the system. Any attempt to invoice in advance for services to be provided on or after 1 April 2017, to capture that invoice within the old FRS rates, will be treated as if the invoice was issued on 1 April 2017 (paras 8.2 and 9.7 of VAT notice 733).

Disbursement or Expense?

What is the VAT treatment on recharged expenses?

There is little logic in VAT legislation, and so the system is set out here for your information. Whether we like it or not, we have to follow the rules!

If you are VAT registered, then you charge VAT to your clients, on top of the cost of your product or services.

If in the course of doing that you incur expenses and you want to recharge those expenses, then you have to charge VAT on top of the expenses as well. The rate is the same rate that you would use for charging VAT on fees (and that can vary). The absurdity of this “VAT on recharged expenses rule” means that (for example) the cost of a train ticket which is normally exempt from VAT, becomes a VATable item the moment you recharge it to a client.

Any expense which you “consume” and then recharge to your client falls into this VAT catchment area. The only time you can avoid charging VAT on an expense is when it falls into the narrow definition of a “disbursement”.

That’s for things that you do not consume as part of your service, but which you pass on intact to your client, or on behalf of your client. In the case a solicitor handling a house purchase, the stamp duty is a disbursement and not an expense. It is not “consumed” as part of the service which the solicitor provided.

Likewise, if I recharge the costs of providing my clients with tea, coffee and milk, then I need to add VAT to the bill (even though food is not liable to VAT). Whereas if I bought a carton of milk for you and handed it over, unused and unopened, then it would be classed as a disbursement.

Crazy, but true. As a general rule add VAT on top of all the expenses that you recharge to your clients!